Death Tax Reduction

Death Tax Reduction

The federal estate tax which is imposed on taxable estates exceeding $675,000, can be reduced through various techniques;

* Lifetime gifts: Each person can make annual gifts of $10,000 ($20,000 per couple, if married) to any number of donees; e.g., children or grandchildren, without incurring a gift tax.

* Charitable transfers: Bequests at death or lifetime charitable gifts can reduce the estate size and thus reduce the tax. lifetime gifts provide the added benefit of an income tax deduction. Gifts can be of a partial interest; for example, one can retain the right to income for life.

* Marital transfers: Generally, neither lifetime gifts nor bequests at death to one's spouse are subject to death taxes. This in effect defers the tax until the surviving spouse dies. Special rules apply to noncitizen spouses.

* AB type trusts: The AB or credit shelter trust makes certain that the unified credits of both spouses are used. This can bring significant savings to many estates.

* Estate value freezing techniques: Corporate recapitalizations, personal holding companies and multi-tier family partnerships which previously transferred future growth of a business to a younger generation while still retaining power to control the business, have almost been eliminated.

*Private annuity: Generally, a private annuity is the sale of an asset to a younger generation in exchange for an unsecured promise to pay annual amounts for the seller's lifetime. This removes the assets from the estate; however, the payments, if accumulated, could build up over the seller's life expectancy to the size of the asset which was transferred.

*Life insurance trusts: by transferring small amounts of the estate (equal to the insurance premium) to an irrevocable life insurance trust, an estate owner can reduce his or her current estate while creating a much larger asset outside the estate. The proceeds of the policy will not be subject to income taxes or federal estate taxes at the estate owner's demise.

For 2000 and 2001, $675,000 is the amount of assets protected by an individual's unified credit. The amount of assets protected by the unified credit is termed the "applicable exclusion amount." This amount will change each year, as follows: $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; $1,000,000 in 2006 or thereafter.

The annual exclusion amount is indexed for inflation after 1998.